Oil firms: Better days ahead

The fuel price hike is a positive sign for stocks

The government's decision to hike petrol and diesel prices by Rs 2 and Re 1 per litre respectively will help oil marketing companies (OMC) only to some extent in a difficult operating environment as prices of politically sensitive products such as kerosene and domestic liquefied petroleum gas (LPG) have not been changed.

The under-recoveries incurred for selling kerosene are currently estimated at Rs 17 per litre, while in the case of LPG it is estimated at Rs 250 per cylinder.

Nevertheless, OMCs were losing nearly Rs 7 per litre on petrol and Rs 8 per litre on diesel, which will come down now.

The government had earlier raised the oil bond contribution to 57 per cent from 42.7 per cent of under-recoveries, while keeping the share of upstream players constant at a third.

The moves will mean gains for Oil and Natural Gas Corporation (ONGC) of about Rs 2,100 crore annually.

For a player like Indian Oil Corporation (IOC), which was saddled with estimated under-recoveries of Rs 170 crore per day, losses are likely to be lower by Rs 25-30 crore per day.

Understandably, oil stocks were on fire in a strong market on Thursday with Bharat Petroleum Corporation Limited (BPCL) rising 10.9 per cent to Rs 465 and IOC closing 13.8 per cent higher at Rs 537, while HPCL was up 15 per cent at Rs 298. BPCL and IOC both are currently discounted about 10.5 times estimated FY09 earnings and still offer some value.

Total under-recoveries for OMCs were earlier estimated at Rs 72,000 crore for the entire FY08, which analysts estimate could come down by about Rs 800-900 crore post the hikes. On an annualised basis, they are expected to come off by Rs 7,500 crore.

For the first nine months of FY08, under-recoveries for OMCs were estimated at Rs 47,600 crore, a rise of 12 per cent y-o-y.

Besides, there could be a small cushion for operating margins in the improved gross refining margins (GRM), given the current global refining capacity shortage. GRMs are currently estimated at $6 per barrel compared with $4.5 per barrel levels a year earlier.

IT sector: Caution is the watchword

Infosys Chief Executive Officer Kris Gopalakrishnan says there is some sign of a slowdown in the industry though there will be growth. He also believes there could be some more job losses.

The TCS management has said that two large BFSI clients have delayed projects though the company has signed three large deals worth $50-100 million over the past month.

It remains cautious on the BFSI and retail verticals nonetheless. The market is obviously hanging on to every word of what IT companies are are saying and are understandably cautious: The BSE IT Index was up less than a per cent in a strong market on Thursday even when the Sensex was up by nearly 5 per cent.

Over the past month or so, the IT index had actually outperformed the Sensex.

Despite a slowdown in the US, tier-I IT companies should manage a 18-20 per cent revenue growth in dollar terms. That's because in a challenging environment, even if price increases for deals are far fewer, volumes should grow as a result of increased offshoring.

However, a slowdown could delay projects as clients reassess their IT spends and that could mean a slight drop in margins and lower earnings growth of 2-5 per cent than anticipated earlier.

The March and June quarters could be disappointing but the rest of FY09 may be fine if the slowdown is not as severe as expected.

While not being de-rated significantly any further, IT stocks could command slightly lower multiples than before.

At the current price of Rs 1547, Infosys trades at 16 times estimated FY09 earnings while TCS and Satyam trade at 15 times.

While the multiples are way below the levels of 22-24 times seen about a year ago, it may yet be too early to buy.